Characteristics of target costing: theoretical and field study perspectives

Abstract Purpose – to explore the characteristics of target costing

Introduction
Target costing became popular in the English language literature in the 1990s (Cooper, 1995; Kato, 1993; Monden and Hamada, 1991).

Target costing is a cost management.

Definition
Target costing is the process of determining the target cost for products early in the new
product development process (NPD) and of supporting the attainment of this target cost
during this NPD process, by providing target costing information to motivate the NPD team
to realize downstream cost management of new products in order to ensure product
profitability when launched.

8 Characteristic of Target Costing
1. The target sales price is set during product planning, in a market-oriented way.
2. The target profit margin is determined during product planning, based on the strategic
profit plan.
3. The target cost is set before New Product Development really starts based on either the subtraction or the addition method.
4. The target cost is subdivided into target costs for functions, subassemblies, cost items,
designers or suppliers.
5. Target costing requires cross-functional co-operation.
6. Detailed cost information is provided to support cost reduction.
7. The cost level of the future product (drifting cost) is compared with its target cost at
different points during NPD.
8. Establishing the general rule that “the target cost can never be exceeded”.